Napa Earthquake Fallout: Is Your Business Covered with a ‘Differences in Conditions’ Policy?

The earthquake in Napa last month illustrates the exposure that all California businesses have to this unpredictable risk.

While most modern structures are built to withstand earthquakes of a certain size, many older buildings throughout the state are not up to standard, resulting in more damage and replacement costs should a temblor strike. The reality is that whatever its age, a building could suffer structural damage that could cost millions to repair.

Besides the risk to people and property, many business owners are unfortunately surprised to learn after the fact that their commercial property policy won’t cover damage from an earthquake.

Insurers set rates so that the premium they collect on policies will cover any money expected to be paid out in claims. The company spreads the risk of loss over many policies in the hope that only a small number will suffer damage. However, large disasters, like floods and earthquake, will typically affect many policyholders at once, a scenario that many insurers try to avoid – and they do so often by excluding such coverage in their commercial policies.

To fill this gap, you can turn to a “Differences in Conditions” policy. A DIC policy can be useful if you face either flood or earthquake risk in your area and your property carrier doesn’t offer coverage for these risks, cannot provide full limits to cover potential losses, or can only offer this coverage at rates that are essentially cost-prohibitive.

Most property policies are written on an “open perils” basis (meaning they will cover many types of claims resulting from acts of God), but they usually exclude flood and earthquake risk.

Besides providing coverage for flood and earthquake losses, a DIC policy may also be used to provide excess limits over flood and earthquake coverages made available by endorsements to a commercial property policy or through the National Flood Insurance Program.

Furthermore, because a DIC is often written as a type of inland marine insurance, it also may be used to address other risks that may not be covered in commercial property policies, such as property in transit, property overseas, or business interruption claims arising from an earthquake or transit loss.

One thing you should know, however, is that a DIC policy is what’s known as a “non-filed” policy. That means insurers do not have to file rates for approval with state insurance departments, and they have greater flexibility in setting rates and drafting policy language. Insurers are often willing to negotiate coverages and limits with policyholders.

Often, the terms and conditions in a DIC policy can vary in important ways from one insurer to the next, so you need to choose carefully. Opting for a DIC policy with terms and definitions that conflict with your underlying commercial property policy can cause coverage problems.

Does your business need a DIC policy

You need to ask yourself if you need more protection than that provided by standard property insurance, especially with regard to flood and earthquake perils. If you live in an area that’s prone to earthquakes and your commercial property policy excludes such events, you may need it.

This holds true especially for contractors, manufacturers, retailers, and a variety of service and professional businesses.

Since flood or earthquake losses can be catastrophic, no one insurer may be willing to write a DIC policy with the limits requested or needed by the insured. In such cases, two or more insurers may be willing to share the risk on a layered basis or through a quota share (an agreed-on percentage) approach.

We are here to help you by comparingthe coverages and exclusions of various DIC policies to find which one would best fit your needs.